Big banks brace for credit problems

Rising interest rates may make it harder for customers to repay loans

BY EILEEN ALT POWELLTHE ASSOCIATED PRESS

Published: Tuesday, April 17, 2007 at 6:30 a.m.

Last Modified: Tuesday, April 17, 2007 at 12:00 a.m.

NEW YORK - Despite strong growth in revenue, profit at Citigroup Inc. fell 11 percent in the first quarter as the nation's largest financial institution took a charge to cover a massive restructuring aimed at improving earnings.
Still, it beat Wall Street expectations, sending its shares up strongly on the New York Stock Exchange.
Meanwhile, the nation's fourth largest bank, Wachovia Corp., reported that its first-quarter profit rose 33 percent on higher lending income and the acquisition of Golden West Financial Corp.
The reports released Monday were the first in a week packed with bank and brokerage earnings results that were expected to set the tone for the year. Profits were anticipated to be harder to come by as rising interest rates make it more difficult for some of the banks' corporate and consumer customers to pay back loans, including mortgages.
While some lenders who provide mortgages to people with poor credit have been failing, there are no signs of a significant spillover to money center banks. Even the big banks are bracing for growing credit problems, however.
"We continue to expect some deterioration in credit as the year progresses," said Gary Crittenden, Citi's chief financial officer.
Citigroup and Wachovia increased their provisions for loan losses in the first quarter. Both held down the growth of expenses - a typical strategy in a weakening credit environment.
Citigroup's chairman and chief executive, Charles Prince, told a conference call with analysts that he was pleased the bank had achieved "positive operating leverage" in the first quarter, with revenue up 12 percent - more than the 10 percent rise in expenses. That should please investors, who had been pressing for expense control.
"It feels good to me to see that progress," Prince said. "We are delivering on our plan."
Last week, Citi announced that it would eliminate about 17,000 jobs and cut some $2 billion in operating costs this year.
Like other U.S. financial institutions, Citigroup has begun taking steps to deal with weakening consumer credit.
"Credit costs increased $1.26 billion, primarily driven by an increase in net credit losses of $509 million and a net charge of $597 million to increase loan loss reserves," the bank said. It said the $597 million charge compared with a net reserve release of $154 million a year earlier.
This included higher losses and reserves in the U.S. consumer division, Citi said, reflecting "an increase in delinquencies in second mortgages and a change in estimate of loan losses inherent in the portfolio."
At Wachovia, the bank increased its provision for credit losses to $177 million in the first quarter from $61 million a year earlier. It said that net charge-offs rose to 0.15 percent of loans from 0.09 percent a year earlier, while nonperforming assets increased to 0.40 percent from 0.28 percent.
The bank also said it was on track to meet its goals from its $24.2 billion acquisition of Golden West, though Chief Executive Ken Thompson said "it's a trying time to be a participant in the mortgage market."
Speaking on a conference call, he said: "Like everyone else, we're experiencing slowing mortgage originations, and customers are showing a preference for less profitable products."
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AP Business Writer Ieva M. Augstums in Charlotte contributed to this story.
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On the Net:
http://www.citigroup.com
http://www.wachovia.com

NEW YORK - Despite strong growth in revenue, profit at Citigroup Inc. fell 11 percent in the first quarter as the nation's largest financial institution took a charge to cover a massive restructuring aimed at improving earnings.<BR>
Still, it beat Wall Street expectations, sending its shares up strongly on the New York Stock Exchange.<BR>
Meanwhile, the nation's fourth largest bank, Wachovia Corp., reported that its first-quarter profit rose 33 percent on higher lending income and the acquisition of Golden West Financial Corp.<BR>
The reports released Monday were the first in a week packed with bank and brokerage earnings results that were expected to set the tone for the year. Profits were anticipated to be harder to come by as rising interest rates make it more difficult for some of the banks' corporate and consumer customers to pay back loans, including mortgages.<BR>
While some lenders who provide mortgages to people with poor credit have been failing, there are no signs of a significant spillover to money center banks. Even the big banks are bracing for growing credit problems, however.<BR>
"We continue to expect some deterioration in credit as the year progresses," said Gary Crittenden, Citi's chief financial officer.<BR>
Citigroup and Wachovia increased their provisions for loan losses in the first quarter. Both held down the growth of expenses - a typical strategy in a weakening credit environment.<BR>
Citigroup's chairman and chief executive, Charles Prince, told a conference call with analysts that he was pleased the bank had achieved "positive operating leverage" in the first quarter, with revenue up 12 percent - more than the 10 percent rise in expenses. That should please investors, who had been pressing for expense control.<BR>
"It feels good to me to see that progress," Prince said. "We are delivering on our plan."<BR>
Last week, Citi announced that it would eliminate about 17,000 jobs and cut some $2 billion in operating costs this year.<BR>
Like other U.S. financial institutions, Citigroup has begun taking steps to deal with weakening consumer credit.<BR>
"Credit costs increased $1.26 billion, primarily driven by an increase in net credit losses of $509 million and a net charge of $597 million to increase loan loss reserves," the bank said. It said the $597 million charge compared with a net reserve release of $154 million a year earlier.<BR>
This included higher losses and reserves in the U.S. consumer division, Citi said, reflecting "an increase in delinquencies in second mortgages and a change in estimate of loan losses inherent in the portfolio."<BR>
At Wachovia, the bank increased its provision for credit losses to $177 million in the first quarter from $61 million a year earlier. It said that net charge-offs rose to 0.15 percent of loans from 0.09 percent a year earlier, while nonperforming assets increased to 0.40 percent from 0.28 percent.<BR>
The bank also said it was on track to meet its goals from its $24.2 billion acquisition of Golden West, though Chief Executive Ken Thompson said "it's a trying time to be a participant in the mortgage market."<BR>
Speaking on a conference call, he said: "Like everyone else, we're experiencing slowing mortgage originations, and customers are showing a preference for less profitable products."<BR>
---
AP Business Writer Ieva M. Augstums in Charlotte contributed to this story.<BR>
---
On the Net:
http://www.citigroup.com
http://www.wachovia.com